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I am foreigner in Germany, and I have noticed that my neighbours seemed to have no problems financing very expensive lifestyle, which I doubt can be afforded by salary alone.

My question is: Is there something fundamental about personal finance in Germany that I do not understand, and if so, I would appreciate help. My basic assumption is: a loan has to be paid out, eventually.

Here are a few cases:

  1. A couple, my neighbor: the lady works ~2 days a month in elder care facility ("pflegefrau"). She has been working for 10 years. Her partner works on an individual contract basis, if and when work shows up. The couple rotate their individual cars every 3 years, purchasing new ones (~30K Eur each, minimum). On top of that, they recently bought a house worth 700K Euro recently. Based on a reasonable assumption that they would like to pay off the house in 35 years (i.e., until retirement), the monthly payments for the house alone works out (based on impossible 0% interest) to 1668 Eur per month. I have not accounted for the cars, vacations (about 3 times a year), and other expenses. The couple already took out ~80K Eur loan to renovate their current apartment, which they put on sale for 250K Euro, but has not been sold yet.

  2. A local advertisement listed that an "augenoptiker" was looking for a house upto 750K Euro. This link tells me that the gross selary for an augenoptiker is around 3000 Eur a month (before taxes). I am lost as to how the augenoptiker would pay off for the house, keeping in mind that living expenses are not yet accounted for.

  3. A local construction worker told me that he recently bought a house worth 500K Eur, and would have no problem spending another 100K Eur in renovating it. He is the only earning member of his family, which amounts to 1429 Eur per month of payments for 35 years, even at 0% interest.

The issue is that I am currently limiting myself to those properties (houses, or apartments to buy) for which I can pay off completely until retirement (another 30 years). I reserve money per month for living expenses, vacation, emergencies, etc., based on which I can afford to buy a house not exceeding 450K Euro. This limit puts me at a disadvantage in the current property market, where the demand far outstrips the supply -- leading to highly inflated list prices for current properties.

In the current context, and with the examples I listed, I am a bit lost in how people usually manage their expenses and stay financially afloat.

Any tips will be appreciated.

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    Maybe they inherited lots of money - lots of accumulated family wealth and low wage income? Maybe they are financially irresponsible and appear yo be floating but really just haven't finished sinking yet? – Patrick87 Nov 1 '20 at 16:33
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    You also make the naive assumption that i.e. the "augenoptiker" is employed. I can assure you that if he runs his own business he may actually earn a lot more. And yes, I would assume quite a lot of those people actually have money from other sources that are not visible for you, i.e. inheritance. – TomTom Nov 1 '20 at 16:59
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    They buy the car for 30.000 EUR and sell it for (much) more than 20.000 after 3 years. It's not too much money spent, as the get it back. – Bernhard Döbler Nov 1 '20 at 18:42
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    The only way to know for sure is to extract answers from your neighbor and the construction worker. – Flux Nov 2 '20 at 1:28
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    I am a German in Germany, and I often wonder the same thing. But as already pointed out, in Germany a lot of money runs in families - almost nobody will be able to afford 750k on a monthly income alone (also if they rotate their cars, the cars will be leases rather than bought outright - might not actually be cheaper, but they don't have to borrow large sums upfront). Also keep in mind that what you are seeing is not the "typical" German (the average German makes 2500 Euros gross and struggles with the rent). – Eike Pierstorff Nov 2 '20 at 9:05
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They may be living on borrowed money and saving very little for the future. They probably don't own the cars they drive around in, and the house has a very large mortgage.

Also, they may have inherited much of the money they have. Families in Europe can be quite small, maybe one or two children. So when the parents die, their descendents may be left with a substantial sum of money to put towards their new house.

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You don't know what your neighbor earns with his freelancing - freelancers can earn very well even if they occasionally have less work.

The Augenoptiker might have his own business, earning a lot more than 3000€/month.

And the construction worker might also earn more than you think - I know the ones working on our house had all sorts of profitable side projects buying old houses, fixing them up and selling for a profit.

In general, younger people in Germany don't really save that much for emergencies and retirement (whether that is advisable or not is another question) because the welfare system is pretty good here in Germany. Who needs 6 months of living expenses saved, when the state unemployment insurance covers 60% of your previous salary while you're job searching?

Also, the overwhelming majority of Germans has very good health insurance with very little copay (and you can deduct any copay above 1% of your income from your taxes).

And Germans tend to be rather well insured in other areas as well. Car liability insurance is mandatory but the overwhelming majority also has private liability insurance, car damage insurance, and a bunch of other insurances which tend to be affordable because so many people have them (https://www.gdv.de/de/themen/news/versicherungsschutz-versicherungsdichte-ueberversicherung-49418)

On the other hand, saving up for a down payment is still quite popular in Germany. Many young people learn to live a thrifty lifestyle in college / during Ausbildung and continue to live like that for a while after ... I had a low six figure sum saved up when I decided to start house hunting.

And 1429€/month for housing may seem a bit much now, but inflation and hopefully salaries rising along with it will make this look much nicer a couple of years down the road. So the rationale is to take out the maximum you can afford now, and live on a modest budget for a couple more years, because each salary increase will give you back a luxury item or two, since your housing costs will stay stable (while cost for renting will go up).

In general, a household is considered overburdened with housing costs if they spend more than 40% of their net income on housing, so banks will generally approve loans up to that threshold - you bring your last three payslips and say how much you've saved up for the down payment and they tell you how much you can spend on your house.

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    Other reasons why Germans need much smaller emergency funds than US Americans are the healthcare system with negligible out-of-pocket expenses and the prevalence of liability insurances and contents insurances. – Philipp Nov 2 '20 at 14:34
  • Many thanks. However, don't you have to save for stuff like emergencies which are not covered, trips, birthdays, reading and writing? And quite frankly, there is too much faith in the future and the insurances. I have been through two instances wherein the insurers read out the tiny text in the contract to deny payment. – O oLo O Nov 13 '20 at 20:41
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    @OoLoO emergencies that are not covered ... yes, you should have a small fund for that. But how large this fund needs to be is also a matter of how you handle emergencies. If your dryer breaks during the first years with the tight budget, will you buy a new one for 500€, will you find a used one on eBay for 50€ or will you just hang your clothes to dry for free, also saving some on your electricity bill? Trips just aren't in the budget at the beginning. Do a staycation and work on your new yard, it'll need it. Writing is cheap. For reading, get a library membership instead of buying books. – Sumyrda - remember Monica Nov 14 '20 at 19:58
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    @OoLoO Too much faith in the future and in insurances - yes, that happens. Sometimes people have to sell their house because they can no longer afford it for one reason or another. You can't completely safeguard against that. Even if you were to save up for a 100% down payment (which is much more difficult that paying down a mortgage, because of inflation) you could still end up in a situation where you can't afford property tax and utilities on your house and have to sell and downsize. But it's unlikely so people don't really take that into account. – Sumyrda - remember Monica Nov 14 '20 at 20:05

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